Taxing services has never been simple. Services such as financial services are intangible in nature. Applying value added tax (VAT) on most financial services would be a compliance nightmare.
One reason is the difficulty of establishing a suitable VAT base for financial services. For this and other reasons, worldwide, financial services have traditionally been exempted from the VAT.
But few countries, including Tanzania, appear to have started moving away from the tradition.
From 2015, Tanzania started to make some VAT reforms to start collecting VAT on fees charged by financial services providers to their customers. However, the implementation of it has several glitches.
There is a multitude of questions that remained unanswered. But recently the Minister of Finance has issued regulations that clear some of the pending questions. The VAT Regulations (“The Value Added Tax (General) (Amendment) Regulations, 2018”), among other things, require financial institutions to issue “periodic statements” to its customers.
What are “Periodic Statements”?
Ideally, the periodic statements are intended to serve the same functions as “tax invoices”.
According to the VAT Regulations, “periodic statement” means a statement issued on monthly basis by a supplier of financial services. The VAT Regulations makes it mandatory for financial institutions to issue periodic statements to its customers who are registered for VAT.
For customers who are not registered for VAT, issuance of periodic statements is optional.
The VAT Regulations prescribe the contents of the periodic statements. The required contents make periodic statements fundamentally different from the traditional “bank statements”.
In addition to the standard contents such as a date, the periodic statements need to have name, address, TIN and VAT number (VRN) of both the customer and the financial institution.
The periodic statement also needs to show all transactions, the value of each transaction excluding VAT, the VAT rate applied, the amount of VAT charged and the total amount payable by the customer.
So, the concept here is pretty much the same as a tax invoice.
Implications to financial institutions
To comply with the new regulations, financial institutions now need to know the VAT status of all its customers. Both existing and new.
The new requirements may also call for some system changes. Changes that will enable them to issue the periodic statements with the prescribed contents.
Implications to customers
According to the VAT Regulations, a customer of a financial institution who is registered for VAT will not be entitled to claim VAT charged by a financial institution unless such VAT is supported by a periodic statement at the time of filing the monthly VAT return.
Before these new regulations, a traditional bank statement would have sufficed to support the claim. Under the new regulations, a periodic statement is deemed to be a tax invoice.
Of course, the said VAT Regulations have clarified several other VAT aspects such as apportionment of input tax, procedures of moving goods from Zanzibar to Mainland Tanzania, local supply of zero-rated goods and conditions for VAT deferment.
I will discuss some of these in my next article.
Mr Maurus is a partner with Auditax International